Golden Cross For Gold

Today, gold experienced a “golden cross,” a technical indicator that occurs when an asset’s 50-day moving average crosses above its 200-day moving average. It’s the first such movement in nearly two years and is a sign that gold might have further to climb.

But there’s more exciting news involving gold. On the same day that New Jersey Governor Chris Christie endorsed Donald Trump for president, which is sure to give him another boost in the polls, the precious metal received its own high-profile endorsement. In a note to investors today, Deutsche Bank said it’s time to buy gold, writing: “Buying some gold as ‘insurance’ is warranted.” The bank also stated its opinion that gold “deserves to be trading at elevated levels versus many other assets.”

The metal is already up 15 percent so far in 2016, its best start to the year in decades. But it started 2015 strong too, if you remember, before prices began to collapse in February.

So what’s the difference between then and now?

Gold owes a lot of its success this year to negative real interest rates, something it didn’t have on its side in early 2015. As I’ve mentioned many times before, the metal has historically done well when real rates turned negative (because then you essentially end up paying the government to hold on to your money). To get the real rate, you subtract the consumer price index (CPI), or inflation, from the five-year Treasury yield. If it’s positive, investors will be more likely to put their money in Treasuries, and if it’s negative, they’ll seek out other stores of value—including gold.

In January 2015, the five-year Treasury yield averaged 1.37 percent, while inflation, less food and energy, posted a tepid 0.2 percent. This resulted in an overall real rate of 1.35 percent—a headwind for gold.

But here we are a year later, and real rates have gone subzero. With the five-year yield at 1.51 percent and inflation at a healthy 2.2 percent—its strongest reading since June 2012—real rates have dropped to negative 0.69 percent. This has helped make gold much more attractive to investors. For the month, as of February 24, the precious metal has risen nearly 10 percent.

There’s another way of looking at inflation, though—the ShadowStats Alternate Consumer Inflation index. For years, economist John Williams’ site ShadowStats.com has reported actual, or “real,” economic data that often tell a very different story from the official government numbers.

Williams argues that at one time, the official CPI was useful in determining changes in consumer prices year-to-year. But government officials continued to tinker with their methodologies, in effect “moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.”

Below you can see the actual inflation rate, according to ShadowStats, based on 1980 methodologies. Whereas the official CPI is 2.2 percent, “real” inflation is running closer to 9 percent, adding to gold’s allure.

Oil Rallies Following S&P 500’s Best Week of 2016

Following the S&P 500 Index’s best week of 2016, oil prices are strengthening on news that Russia and Saudi Arabia, the world’s two largest producers, are scheduled to meet next month to discuss possible production cuts. This, along with rising gasoline demand in the U.S., seasonality trends and supply disruptions in Iraq and Nigeria, has helped push both Brent and West Texas Intermediate crude comfortably above $30 per barrel. It was oil’s best week since August 2015.

The rally has given investors renewed confidence in domestic stocks after one of the largest equity selloffs earlier in the year. The correlation between crude and S&P 500 stocks is currently at levels not seen since 1990, according to the Wall Street Journal.

Oil’s gain arrives at a time when President Obama announces plans to impose a $10.25 “fee” on every barrel of crude sold in the U.S. The details are fuzzy at this point, but the revenue would reportedly go toward clean energy initiatives such as electric cars, charging stations, public transit and high-speed rail.

These are all admirable goals, but charging oil companies what’s essentially a tax is the wrong way to go about it. The proposal has already been met with strong criticism from analysts and think tanks, who estimate that, if enacted, it would push up production costs, hurt employment and capital formation and lead to slower growth. The Congressional Research Service (CRS) concludes that oil and gas prices would rise, while the Tax Foundation writes:

[T]he annual level of GDP would be 0.3 percent less than otherwise (an annual loss of $48 billion in terms of the 2015 economy), private business capital stocks (e.g., equipment, structures) would be 0.6 percent lower, and 137,000 full-time jobs would be lost.

Again, affordable and reliable clean energy is a noble pursuit, but in the case of the $10.25 tax, the costs far outweigh the benefits. A much better and possibly more consequential strategy can be found in private sector efforts such as Bill Gates’ recently-founded Breakthrough Energy Coalition. Together with a couple dozen other billionaire businessmen and executives—including Richard Branson, George Soros, Mark Zuckerberg, Amazon CEO Jeff Bezos, Bridgewater Capital founder Ray Dalio and Alibaba CEO Jack Ma—Gates plans to invest billions into clean energy innovations over the next several years.

We’re encouraged by the fact that the U.S. just launched its first-ever shipment of liquefied natural gas (LNG) for export. The LNG, sold by Houston-based Cheniere Energy, left the Sabine Pass terminal in Louisiana this week and headed for market in Brazil.

This historic event confirms the U.S. as a major energy superpower, with the potential to be the world’s top supplier, and it should help support LNG demand around the world. The industry has a bright future.

Trans-Pacific Partnership the Cure for Sagging Global Trade

Here at U.S. Global Investors, we follow government policy closely because it’s a precursor to change. The political party matters little. It’s the policies that have the most significant ramifications, and both major American parties are capable of creating both good and truly awful policies.

Having said that, I might disapprove of Obama’s 10 percent oil tax, but I applaud him for continuing to put his weight behind the ratification of the Trans-Pacific Partnership (TPP). The TPP, as I’ve pointed out numerous times before, would help global trade by eliminating 18,000 tariffs among the 12 participating Pacific Rim countries. This week the president said he planned to send the agreement to Congress for a vote sometime this year, and when that day comes, I urge our senators and representatives from both sides of the aisle to make the right choice.

Now more than ever, global trade needs a boost. According to the CPB Netherlands Bureau for Economic Policy Analysis, the value of goods traded across the globe, in dollar terms, fell a whopping 13.8 percent in 2015 after falling 2 percent the previous year.

Meanwhile, world trade volumes grew only 2 percent in 2015, the slowest year since the financial crisis, according to a recent report by the Organization for Economic Cooperation and Development (OECD).

The OECD additionally trimmed its 2016 growth outlook to 3 percent, down 0.3 percentage points from its November projection.

Joining the OECD in downgrading growth projections is the International Monetary Fund (IMF), which lowered its forecast 0.2 percentage points to 3.4 percent. To strengthen growth, G20 countries should “reduce overreliance on monetary policy,” the IMF writes in a report ahead of the meeting among finance ministers and central bank governors in Shanghai this weekend. Further, “credible and well-designed structural reforms” are needed to “lift potential output” and provide some “coordinated demand support.”

I second the IMF’s calls for G20 nations to rebalance their monetary and fiscal policies and to reform rules and regulations that stand in the way of global trade. The TPP, which will involve countries that represent 40 percent of the world’s GDP, is a step in the right direction. But for synchronized growth to be achieved, more will need to be done.

Mark Your Calendars!

I will be in Carlsbad, California, April 13-16, speaking at the Oxford Club’s 18th Annual Investment U Conference. I’m honored to be joined by other respected minds in the world of investing, including Alexander Green, Marin Katusa and Keith Fitz-Gerald. Reserve your seats today by clicking the link above. I hope to see you there!

The Hang Seng Composite lost 0.08 percent this week; while Taiwan was up 1.03 percent and the KOSPI rose 0.20 percent.

The 10-year Treasury bond yield rose 1 basis point to 1.76 percent.

Domestic Equity Market

Strengths

The materials sector was the best performer this week, increasing by 3.07 percent versus an overall increase of 1.71 percent for the S&P 500.

Chesapeake Energy was the best performing stock for the week, increasing 35 percent. The company announced it will pay off the remainder of a half-billion dollar debt that’s coming due in three weeks, a move that was applauded by investors. The company also plans to sell another $500 million to $1 billion in properties this year, is cutting its drilling budget by 57 percent, and is shutting down at least half the drilling rigs it has under contract, all in a bid to conserve cash needed to whittle down its debt load.

This is the first time this year the market has rallied for two straight weeks, perhaps pointing to the start of a new leg up.

Weaknesses

The utilities sector was the worst performer this week, falling 0.14 percent versus an overall increase of 1.71 percent for the S&P 500.

Southwestern Energy was the worst performing stock for the week, falling 10.01 percent. The stock tanked on poor fourth quarter results and a rating downgrade from Jefferies.

Several large U.S. banks are increasing loan loss reserves in anticipation of more troubled loans to companies in the oil and gas industry. JP Morgan and Wells Fargo both announced additional provisions this week. Across the industry, loan loss provisions rose in the fourth quarter of 2015 for the first time since 2009.

Opportunities

The retail drug store industry is enjoying a twin boost from both bullish cyclical and secular forces. The latter is reflected in the long-term advance in personal outlays at pharmacies, which likely reflects increased drug demand as a consequence of an aging population. From a cyclical perspective, the surge in health care sector hiring activity reflects increased health coverage and rising patient volumes. That is a boon for drug demand, and is consistent with rising store traffic.

Both Home Depot and Lowe’s produced strong profit results in the most recent quarter, aided by warm winter weather which pulled forward sales of many products. The odds of the industry maintaining decent sales momentum are good, given that ultra-low mortgage rates should sustain housing turnover.

BCA’s proxy for REIT occupancy rate is still trending higher, supporting good growth in REIT pricing power proxies. Furthermore, pipeline supply pressures look set to ease based on the downturn in multifamily home construction. All of this points to decent cash flow growth prospects. Against a backdrop of still attractive value and depressed yields, REITS look poised to perform.

Threats

M&A has been running red hot over the past few years, as the lack of organic global growth has forced companies to pursue acquisitions. Given the tightening in financial conditions, this source of investment banking income could dry up. The consequence would be that capital market companies will have a large profit hole to fill.

Oil services may be overdue for a rebound, but the typical signposts to a durable outperformance phase remain elusive.

Based on BCA’s U.S. profit models, deeper profit contraction still looms, putting at risk the recent bounce in the equity market.

U.S. GDP during the fourth quarter of 2015 was revised upward to 1 percent, up from the 0.7 percent initial estimate, but still lower than the 2 percent pace set during the third quarter. Growth during the quarter was impacted by a slowdown in net exports. For the full year, gross domestic product rose 2.4 percent, matching 2014’s growth rate.

Personal spending for January grew 0.5 percent, up from the previous month’s 0 percent and beating expectations of 0.3 percent.

Weaknesses

U.S. Federal Reserve Vice Chair Stanley Fischer said it is too early to assess the impact of recent market volatility on the U.S. economy. Investors seem to disagree, having priced out Fed rate hikes until late 2017, a sharp departure from just two months ago, when markets expected multiple hikes this year.

European inflation remains depressed. Consumer prices in the eurozone rose a scant 0.3 percent on an annualized basis in January. This will keep pressure on the European Central Bank to add additional monetary policy stimulus at its policy-setting meeting in March.

The Consumer Confidence Index fell to 92.2, down from the previous 98.1 and disappointing consensus expectations of 97.2.

Opportunities

Given the persistent strong correlation between high-yield spreads and oil prices, any signs of greater stability in the oil market should help keep a lid on spreads. With the average dollar price of the Barclays Energy High-Yield sub-index now trading at 58, the market is already priced for substantial default losses from the shale oil companies that dominate the Energy index. The price of Brent is now trading -26 percent below its 40-week moving average. The option-adjusted spread (OAS) for the Barclays U.S. High-Yield index is now trading 177 basis points above its 40-week moving average. For both oil and high-yield, these represent some of the most oversold conditions seen in the past 15 years.

According to BCA, the tightening of financial conditions since last December is sufficient to cause the Fed to adopt a more dovish policy stance at the March Federal Open Market Committee (FOMC) meeting. Specifically, BCA believes the Fed will keep the funds rate steady and will also lower its projections for future increases. Consistent with the Fed Policy Loop, which has now played itself out several times over the past year, risk assets could rally from here, on the back of a more dovish Fed.

Threats

Monthly payroll data (released next Friday) is a key input to the Fed’s rate decision-making process. Given the bond market’s very low expectations of further imminent rate hikes, a strong payroll number could trigger a violent move in yields.

The U.S. ISM surveys (manufacturing released on Tuesday and non-manufacturing on Thursday) will offer some insight into whether any economic slowdown has spread beyond the manufacturing sector, and also the extent to which selling prices are falling.

Speaking at an oil industry conference this week in Houston, Saudi oil minister Ali Ibrahim Al-Naimi said producers will meet in March in hopes of negotiating an output freeze. However, he added that production cuts will not occur. Even if production cuts are agreed to in principle, they will likely not be implemented, as there is less trust than there usually is among the world’s oil exporters, he said.

Gold Market

This week spot gold closed at $1,222.65, down $3.65 per ounce, or 0.30 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, climbed 2.29 percent. Junior miners underperformed seniors for the week as the S&P/TSX Venture Index traded up 1.37 percent. The U.S. Trade-Weighted Dollar Index rose 1.60 percent for the week.

Date

Event

Survey

Actual

Prior

Feb-23

US Consumer Confidence Index

97.2

92.2

97.8

Feb-24

US New Home Sales

520k

494k

544k

Feb-25

Hong Kong Exports YoY

-3.2%

-3.8%

-1.1%

Feb-25

Eurozone CPI Core YoY

1.0%

1.0%

1.0%

Feb-25

US Initial Jobless Claims

270k

272k

262k

Feb-25

US Durable Goods Orders

2.9%

4.9%

-4.6%

Feb-26

Germany CPI YoY

0.1%

0.0%

0.5%

Feb-26

US GDP Annualized QoQ

0.4%

1.0%

0.7%

Feb-29

Eurozone CPI Core YoY

0.9%

—

1.0%

Feb-29

Caixin China PMI Mfg

48.4

—

48.4

Mar-1

US ISM Manufacturing

48.5

—

48.2

Mar-2

US ADP Employment Change

185k

—

205k

Mar-3

US Initial Jobless Claims

270k

—

272k

Mar-3

US Durable Goods Orders

—

—

4.9%

Mar-4

US Change in Nonfarm Payrolls

193k

—

151k

Strengths

The best performing precious metal for the week was gold, by a significant margin. Gold experienced its first “golden cross” in two years, as the 50-day moving average moved above the 200-day. This week Georgette Boele from ABN Amro, who switched her gold outlook from bearish to bullish, noted that investors are now buying the metal on dips, rather than selling on rallies as they’ve done previously.

Gold rose for a fourth day to head for its biggest monthly advance in four years, reports Bloomberg. Inflows into ETFs backed by the precious metal amounted to about 50 tons in two days, added a report from Commerzbank, the sharpest two-day inflow since the Greek crisis flared up in May 2010.

Extending gold’s rally this week, a private report issued Wednesday showed the worst reading on U.S. service-sector activity since 2013, with separate data showing new home sales fell more than forecast. As financial markets remain fragile gold has benefited. Commerzbank analyst Carsten Fritsch said by email this week, “It is a clear shift in investor sentiment and therefor an important sign.”

Weaknesses

The worst performing precious metal for the week was silver, with a slide of 4.16 percent. Palladium can apparently count itself lucky as it finally dodged a bullet with it not coming in as the weekly worst performer in the precious metal space, as it has consistently been shunned by investors.

China’s imports of gold from Hong Kong slumped to the smallest amount since 2011 in January, reports Bloomberg, with net purchases falling to 17.6 metric tons from 111.3 tons in December. In India the jump in bullion costs has dampened Indian demand, with price discounts widening from as little as $4 in November to $30 an ounce, according to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation.

Core CPI gained the most in four-and-a-half years, up 2.2 percent year-over-year and exceeding the Federal Reserve’s 2 percent inflation target. Sputnik News says according to the regulator’s data-based approach to tightening monetary policy, the Fed will have to respond with another rate hike. The odds of a 2016 rate hike climbed to 44 percent from 11 percent on February 11, according to Bloomberg. The cost of living in the U.S. (excluding food and fuel) increased in January by the most in four years, adding to the prospects of the Fed raising rates.

Opportunities

According to the World Gold Council, central bank gold sales have historically resulted in a market surplus. From the second quarter of 2009 through 2015, net gold purchases by central banks absorbed most of the surplus, reports Bloomberg, which may continue as reserve portfolio diversification is pursued. Bloomberg Intelligence estimates that central banks accumulated more than 2,448 metric tons of the metal versus gold ETF outflows of around 270 metric tons in the period.

The San Francisco Fed is calling for a period of inflation overshoot, according to a note from UBS. Given economic slack, the Fed sees possible benefit in allowing inflation to rise above 2 percent for a short period (good luck putting the genie back in the bottle) to achieve a better balance between the Fed’s dual mandates. Investing.com reports this week that if negative interest rates come to the U.S., savers might park their cash under their mattresses. Or a better option may be in holding hard assets such as gold.

Top gold forecaster Barnabas Gan called gold a “superhero” this week, saying the precious metal could rally as high as $1,400 an ounce amid the global equity downturn, low oil prices, and magnified risk aversion. Another bullish sign for gold comes from a Bloomberg report this week showing that, for most of last year, the volatility of puts exceeded that for calls. But now, the situation is reversed, indicating there is strong interest in higher gold prices.

Threats

The market could be losing faith in the Fed’s current narrative, says ZeroHedge, with bets on negative interest rates reaching record levels (with 2017 more likely than 2016). The article noted investors were now turning to Eurodollar futures to lock in interest rate sensitive trades as puts on the S&P 500 were progressively becoming more expensive. Further ZeroHedge noted, “We are at that inflection point where the Fed starts to waffle, the bear market beckons and they will not be able to stick with their interest rate guidance.”

Concerns over diminishing liquidity dominated discussions at this week’s TradeTech FX conference, reports Bloomberg, namely because some say it is drying up during periods of turbulence. The worry over shrinking liquidity gripping fixed-income desks, due to higher capital requirements, is creeping its way into the world’s biggest, most liquid financial market of currencies, the article continues.

In a report from MacroStrategy Partners this week, Julian Garran argues that we could see both a significant margin contraction and a serious price/earnings derating of U.S. equities in 2016 and 2017. Such a combination could lead U.S. stocks down more than 40 percent, peak to trough. Mike Norman, writer for Real Money and TheStreet.com, thinks that quantitative easing and other monetary policies are nothing more than asset swaps, rather than printing as many believe. Norman says these operations are actually deflationary rather than inflationary since they reduce interest income. Bond purchases by the Fed have also removed U.S. Treasuries – the most important global collateral around – from the world economy, which is like draining the oil that keeps an engine running.

Energy and Natural Resources Market

Strengths

Gold posted a bullish “Golden Cross” pattern this Friday after strong inflows drove the yellow metal up more than 15 percent year-to-date. A post on Zero Hedge notes that the last time this pattern occurred coupled with major fund inflows was in February 2009, which marked the start of a dramatic trend higher in the precious metals.

The best performing sector for the week was the S&P 500 Construction Materials Index. On the back of strong earnings reports for companies in the sector, JP Morgan analysts upgraded their views on the materials sector, specifically recommending investing in companies exposed to the U.S. construction materials sector.

The best performing stock for the week in the broader natural resource space was Tesoro Corp. The Texas-based refiner rose 14 percent for the week as gasoline demand remained resilient, and West Coast crack spreads rebounded strongly as contracts rolled into summer grade gasoline pricing.

Weaknesses

Natural gas demand continues to soften as evidenced by another extremely soft storage withdrawal, adding to the storage overhang and pushing prices to a 17-year low. Desjardins analysts report that next week’s storage draw is tracking even below this week’s level, just as the two-week weather forecast remains bearish for implied heating demand.

The worst performing sector for the week was the S&P 500 Integrated Oil & Gas Index. Exxon Mobil Corp. and Chevron Corp., both major weightings in the index, were advised by Moody’s that their credit ratings are at risk of being cut despite sizable reductions to their 2016 capital budgets.

The worst performing stock for the week in the S&P Global Natural Resources Index was Goldcorp Inc. Shares in the Canadian gold miner dropped 13 percent on Friday after the company posted a surprise loss on higher costs. The company also downgraded its forward guidance and slashed its dividend by 66 percent.

Opportunities

Refiners are poised for a rebound after gasoline inventories dropped 2.2 million barrels this week, likely putting an end to the weakest annual seasonal period. On a related note, VTB Capital notes that gasoline demand continued to improve strongly, up 5.2 percent year-over-year, setting up for a strong spring-summer destocking period.

In addition to the bullish outlook for gasoline consumption and destocking in the U.S. over the coming months, gulf refiners are likely to see gasoline exports spike as Mexico will speed up the liberalization of fuel imports. President Enrique Pena Nieto is said to sign a decree allowing local companies to begin buying gasoline and diesel from overseas as soon as April.

The rally in steel and iron ore prices may continue as news January’s steel output figures by worldsteel show further supply curtailments. Output fell for the 13th consecutive month, posting a 7.1 percent drop from a year ago. According to Macquarie Research, output dropped in every single region, with China leading with 7.8 percent drop.

Threats

Global crude output is not showing any signs of abatement. Bloomberg’s Julian Lee suggests Russian crude and condensate production just set new post-Soviet daily record of 10.92 million barrels per day in February, on data up to February 25. The rate is slightly above January’s numbers, and more than 200,000 barrels per day higher than February 2015.

Crude inventories in the U.S. continue to show the oversupply imbalance is still far from over. Crude stockpiles rose 3.5 million barrels this week to historically high levels of 507.6 million barrels. Inventories at Cushing were up again to fresh record highs of 65.07 million barrels.

North of the border, Canadian production continues to rise despite low prices. David Yager of Oil Price suggests Canadian production will continue to grow for the next three years thanks to oil sands and east coast offshore projects still under construction. By his numbers, Canadian oil output is set to rise by 100,000 barrels per day in 2016 and a total of 585,000 barrels per day over the three-year period.

China Region

Strengths

In China, January new home prices rose month-over-month in 38 cities, and year-over-year in some 25 major cities, with Beijing up 24 percent and Shanghai up 14 percent.

Singapore’s seasonally-adjusted industrial production for January rose month-over-month to a multiyear high of 9.3 percent, far surpassing analysts’ expectations of a decline to 2.2 percent.

The Indonesian rupiah strengthened again this week. The rupiah is the best-performing regional currency for the trailing week, month and quarter.

Weaknesses

The Shanghai Composite Index suffered a particularly ugly day on Thursday, falling 6.41 percent, as somewhat fragile sentiment was undercut following reports that the China Insurance Regulatory Commission banned insurance company Zhongrong Life from adding to its equity holdings due to solvency concerns.

Despite a hefty injection of liquidity on Thursday, China’s overnight repo rate still rose to its highest level since before the Lunar New Year holiday.

The Dongyue Group fell almost 23 percent as trading resumed after the company reported suspected misappropriation of funds by former staff members. Dongyue’s price action makes it the worst performer for the week within the Hang Seng Composite Index.

Opportunities

Bloomberg reports that the People’s Bank of China (PBOC) issued a statement suggesting a tweak in China’s monetary policy, as the PBOC clarified that instead of maintaining a “prudent policy” with “reasonable, ample” liquidity, it will now maintain a “prudent policy with a slight easing bias.” This follows reports from PBOC officials that China could afford to raise its budget deficit to 4 percent.

Indonesia’s parliament announced a move mandating that all workers (of at least 20 years of age, or married, or even a foreigner with at least a six-month work permit) participate in contributions to a public home purchase fund by means of required deductions from workers’ salaries. The public fund will only be used to fund home purchases by low-income workers. The announcement helped spark a rally in Indonesian banks and real estate companies, and follows last week’s move by the government to lower rates, which places pressure upon Indonesian banks’ net interest margins.

The PBOC released another statement on Wednesday explaining that most types of overseas financial institutions will no longer be subjected to quotas for investing in the interbank bond market. The move helps China further open its debt markets to foreigners, permitting inflows to help counter the recent outflows from the country.

Threats

The release of official Chinese and Caixin Manufacturing PMI data will be Monday. Analysts expect the PMI to remain below 50, signaling contraction.

A China State Council directive this week raises some concerns regarding property rights in China. The directive suggests that new residential compounds should not have walls, and that existing government and private compounds should in time remove their walls as well. Any negative outlook for housing could exacerbate outflows from China.

Recent volatility and poor sentiment left over from the early weeks of this year could continue to weigh upon markets.

Emerging Europe

Strengths

Greece was the best performing country this week, gaining 5.53 percent. Moody’s raised its Greek banks debt rating to Ca from C with a stable outlook. The upgrade reflects the successful completion of recapitalization and Moody’s expectation for a modest improvement in funding.

The Russian ruble was the best performing currency this week, gaining 1 percent against the U.S. dollar. Brent crude oil gained 6.6 percent over the past five days.

The industrials sector was the best performer among Eastern European markets this week.

Weaknesses

The Czech Republic was the worst performing market this week, losing 67 basis points. The Consumer Confidence Index declined in February. Purchasing managers’ index (PMI) data will be released next week and is expected to drop to 55.4 from the prior high of 56.9.

The Hungarian forint was the worst performing currency this week, losing 2.59 percent against the U.S. dollar. The forint has appreciated since the beginning of the year and now talks are emerging about the Central Bank of Hungary cutting its main interest rate by 25 basis points in the second quarter, from the current level of 1.35 percent.

The utilities sector was the worst performer among Eastern European markets this week.

Opportunities

Emerging market assets are cheap and could be “the trade of a decade,” according to Research Affiliates LLC, a sub-adviser to Pacific Investment Management Co., one of the world’s largest money managers. The Shiller P/E Ratio, a measure of valuation based on the cyclically adjusted price-to-earnings ratio, fell to 10 in January. There have been only six times when this measure dipped below 10 over the past 25 years. And, in the following five years, stocks gained on average 188 percent, according to Christopher Brightman, chief investment officer at Research Affiliates.

All of the Euro area’s 10 biggest banks say they exceed minimum capital requirements set by the European Central Bank (ECB). Some banks exceed the minimum capital requirements by a wider margin than others, with Italy’s UniCredit showing the smallest buffer.

According to an international survey on the quality of life, Austria’s capital Vienna ranked as the best place in the world to live. The Mercer Quality of Life study examines social economic conditions of 230 global cities and Vienna, a city of nearly 1.8 million people, came in best. Vienna was followed by Zurich, Auckland, Munich and Vancouver. Bagdad was named as the worst city in the world to live.

Threats

The European Commission said that its Economic Confidence Indicator, which aggregates measures of consumer and business confidence, fell to 103.8 in February from 105.1 in January. This is the lowest reading since June 2015. Other economic indicators also point to economic slowdown in the eurozone. February’s PMI number was 51, the weakest since the start of 2015.

Hungary’s government said it will call a national referendum on the European Union’s plan to resettle asylum seekers in Hungary. The EU proposed that each member country must accept a specific number of migrants. Hungary has been a vocal opponent of this plan. The referendum in Hungary is another indication that some EU members are looking to gain more independence from Brussels. A referendum on whether the UK should stay in the 28-member bloc is due to take place at the end of June.

According to one HSBC strategist, the Russian ruble is still not cheap and could depreciate more. The analyst forecasts the ruble at 72 against the U.S. dollar by year-end assuming an oil price of $40 per barrel, and if oil falls to $27 per barrel, than the ruble could depreciate to 100 against the dollar. The Bank of Russia has left the country’s key rate at 11 percent since July, but traders now predict a reduction of as much as 70 basis points, putting pressure on the currency.